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International Trade and Investment

City leaders should know what an aggressive posture on trade can and can’t do for America and their hometowns.

Karen G. Mills and Jan W. Rivkin

Donald Trump’s presidential campaign put forward a powerful storyline: Poor trade deals struck by weak American leaders have empowered cheating foreign governments and disloyal multinationals to move American jobs overseas. An assertive Trump Administration will use every weapon at its disposal, including tariffs and trade wars, to bring those jobs back to the United States, especially from China and Mexico.

Since the election, Trump’s appointments and moves have stuck close to this storyline. The president named Wilbur Ross, a private equity investor and longtime dealmaker, to be Secretary of Commerce and gave his department greater influence over trade matters. Transition duties at the office of the U.S. Trade Representative were given to former Nucor Steel CEO Dan Dimicco and trade attorney Robert Lighthizer, both of whom have argued at times for greater protection of U.S. industry. Lighthizer has also been named U.S. Trade Representative. Peter Navarro, a strong advocate of tougher trade negotiations with China, will head a newly formed National Trade Council. Trump personally strong-armed Carrier not to move all of its Indiana manufacturing jobs to Mexico (with the help of $7 million of incentives from the state); he rattled China by threatening a 45% tariff and taking a congratulatory phone call from the president of Taiwan; and he continued to insist that Mexico would pay to construct a border wall. All signs suggest that the Trump Administration will be characterized by tough renegotiation of trade agreements, brinksmanship in those dealings, visible actions to signal success in the dealings, and public pressure on individual companies.

City leaders who are watching this activity and trying to generate good jobs in their regions should keep three facts in mind. First, it is fantasy to believe that America can meet its job challenges by bringing “our manufacturing jobs” back from “over there.” While it is true that manufacturing employment in America has declined markedly in recent decades, the best estimates suggest that 85% of the decline is due to automation and other productivity enhancers, not global movement of jobs. That helps to explain why U.S. manufacturing output is close to an all-time high even though U.S. manufacturing employment is close to a multi-decade low. (See the figure below.) This is not to say that trade’s impact on employment has been negligible; best estimates are that China’s entry into the World Trade Organization cost the U.S. one million manufacturing jobs, for example.[1] But the U.S. economy as a whole has roughly 145 million employees. Overall, then, relatively few of “our jobs” are “over there” at all. And if any production moves back to America, it will probably be performed with a great deal of automation, not a lot of workers. No city should count on new trade deals to generate a wave of manufacturing jobs that provide a large lift to local employment.

Second, if automation accounts for most of the decline in U.S. manufacturing employment, city leaders should know that the Trump Administration is unlikely to do anything that slows the trend toward greater automation. Last March, Andrew Pudzer, CEO of a fast food chain and Trump’s pick to be Secretary of Labor, explained the advantages of machines over human labor in his view: “They’re always polite, they always upsell, they never take a vacation, they never show up late, there’s never a slip-and-fall, or an age, sex, or race discrimination case.”[2]

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Third, an all-out trade war—though unlikely—is possible under President Trump. U.S. presidents have considerable power over trade arrangements. For example, under NAFTA’s article 2205, the U.S. can withdraw from the North American Free Trade Agreement simply by giving six months’ notice. Under a 1974 law, a president can impose a 15% tariff for 150 days on all imports from a country with a large balance-of-payments surplus. Few checks and balances constrain a president in the short run. Other countries are likely to retaliate before checks and balances kick in, and by then, the trade war would be on.

The upshot is, city leaders should operate under the assumption that no Trump-powered resurgence in manufacturing employment is on its way. Rather, leaders in government, education, and business must continue to help workers, young and old, prepare themselves for higher-skill careers in other sectors of the economy. Moreover, with trade wars possible, sectors of economy that are deeply entwined with international trade become riskier bets for economic development efforts. Sectors that rely deeply on exports, as well as sectors whose supply chains lie overseas, might find themselves weakened by tariffs, quotas, and other disruptions. Conversely, sectors with large domestic markets and secure domestic supply chains look like safer places to focus a city’s economic development energy.

Many under-skilled Americans have suffered from increases in automation and competition from low-wage overseas labor. To offset these pressures, many of the constituencies that elected Donald Trump will be looking for investments in skill building. As candidate and president-elect, Trump has said little about American workforce skills. Nonetheless, cities should be prepared to put forth their workforce skills priorities in the event that further support, such as trade assistance funding, emerges.

Dear YALP participants, what did we get wrong and right here? And how should your city adjust in light of likely national changes in America’s approach to international trade and investment?

[1] See Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price, “Import competition and the great US employment sag of the 2000s,” Journal of Labor Economics, Vol. 34, No. S1 (Part 2, January 2016), pp. S141-S198; and David H. Autor, David Dorn, and Gordon H. Hanson, “The China shock: Learning from labor-market adjustment to large changes in trade,” Annual Review of Economics, Vol. 8 (2016), pp. 205-240.

[2] Kate Taylor, “Fast-food CEO says he’s investing in machines because the government is making it difficult to afford employees,” Business Insider, March 16, 2016.